Digital pathway to financial inclusion

Recent discussions on digital finance in our country have been hijacked by the demonetisation debate, and the polarised discourse surrounding it.

Use of digital payments has increased by 10 percentage points from 2014 to 2017.

Recent discussions on digital finance in our country have been hijacked by the demonetisation debate, and the polarised discourse surrounding it. The use of technology and digital infrastructure helps ecosystem actors overcome the obvious limitations of brick-and-mortar, and has implications for the lives of unbanked and underbanked. Thus, indicators on the uptake of digital finance should encourage discussion on the broader question on financial inclusion in a country dominated by small & micro entrepreneurs, small & marginal farmers and low-income households.

The access to consumer and business credit, and savings avenues for low-income households, continue to be low, with informality receding but slowly. Leveraging ICT is particularly helpful for India as scale is achievable with the unit cost of providing services decreasing for financial institutions. The Global Findex results released a month ago have some interesting findings for India. The data allows for taking a longer-term horizon than the myopic before-and-after-November 2016 scenarios emanating from opposite camps. The data is also globally comparable and derives from a primary survey carried out in all the countries. In India, the survey was carried out between April 21 and June 2, 2017, on a representative sample of 3,000 households.

The use of cash for transactions is lower as compared to 2014. For example, the share of individuals who made utility payments and used cash for the same went down from 91% to 67%. The use of digital payments in general has increased by 10 percentage points—29% of the sample households, compared to only 19% in 2014, said they made or received digital payments in the past one year. While this is an encouraging spurt, neighbouring Bangladesh saw an increase from 7.4% to 34.1% on this indicator between 2014 and 2017. Digital payments are already much more pervasive in other comparable economies such as Indonesia (35%) and South Africa (60%).

The most interesting findings are in disaggregated data. The increase in digital finance uptake is quite sharp among females, the illiterate and the poor. For example, 20% of the first and second quintiles of the population reported making or receiving digital payments in the last one year, compared to 10% in 2014. Likewise, 22% women in 2017 made or received digital payments, compared to 11% in 2014. This is positive for a country where women’s role in a household with respect to finances has been a challenge. This also indicates the power of technology in tackling existing gender gaps in financial literacy, decision-making, etc. One must note that mere ownership of an account by a woman does not indicate economic empowerment. Often, the use and operation of the account and decisions pertaining to the account lie almost squarely with the man in the house. In such a context, the jump in women respondents self-reporting digital payments is heartening.

In India, about 10% of adults without a bank account have a mobile phone. Likewise, more than 10% of bank account holders are still paid private sector wages/salaries in cash. The share is almost twice as large in Indonesia, Myanmar and Nepal, pointing towards persisting informality. About 38% of accounts reflect dormancy, with no deposits or withdrawals in the past one year. Again, this may refer to problems with physical infrastructure, indicating lack of easy access, procedural difficulties and behavioural problems, among others. These are all data points which refer to a problem that going digital can address.

The level of internet penetration is still low—only 20% of households in rural India have access to internet. Contingent on strong internet penetration, tailored financial products and innovative and easy-to-use interfaces/platforms, the digital trend can improve over the years, altering how banking is done. That would have provided solid foundations to think of efficient ways to reach the bottom of pyramid population. This would also provide newer ways to think of implementing priority sector lending, which, going by the traditional route, has not achieved its mandate in its entirety.